No Gains, No Tax. Markets to Take Tax Hikes in Stride

Going into the budget, there were apprehensions about fiscal prudence and whether the budget would indicate a populist turn by the government. However, the message is that of continuity. Apart from the increased allocation of resources to the states of the two coalition partners, there does not seem to be any meaningful difference between the earlier budgets and the current one. The government continues to be on the path of fiscal prudence and consolidation.

There is an emphasis on employment, skilling, and the social sector, and rightly so. There has been some worry about economic growth not fully translating into employment growth. Given the increasing number of young Indians joining the workforce, it was important to address the skilling needs of the people and incentivise the companies to hire more freshers. Encouragement for domestic manufacturing and services continues and the measures announced were on expected lines.

Market players may be disappointed by the somewhat higher rates of Capital Gains Taxes and Securities Transaction Tax (STT). Given the recent statements of the RBI governor and the Sebi chairperson, some disincentives related to the capital markets were expected, especially given the frenetic pace of speculative transactions in the Futures and Options segment.

The market will take these measures in their stride. After all, there is no tax to be paid unless one sells the stocks and realises the gains. The somewhat higher rate of tax may encourage investors to hold on longer and dampen the speculative urge to some extent.

Simplification of the overall capital gains tax regime across asset classes is a welcome move where the rates of tax across asset classes have been aligned. The unintended consequences of non-fixed income mutual funds being clubbed with fixed income mutual funds in the last budget have been fixed, though the amendments will be effective from the financial year starting April 1, 2025.One thing to realise is that the budget does not change the market fundamentals. The equity market has been in a somewhat overvalued range for some time, and caution is required while investing. Consumption-oriented sectors and some newer themes have seen a huge jump in stock prices and valuations, and one must be careful while investing in those.Banks, especially private sector banks, look attractive. Another factor to keep in mind is that while the flows from investors have been high (in MFs and otherwise), the fresh issuance via IPOs, rights issues, and QIPs will also be high. It will be best to approach the markets with caution.